<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Materials Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
Integrated Orthopaedics, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Integrated Orthopaedics, Inc.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[_] $125 per Exchange Act Rules 0-11(c)(I)(ii), 14a-6(i)(1), 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:/1/
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
/1/ Set forth the amount on which the filing fee is calculated and state how it
was determined.
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 6, 1998
To the Stockholders of Integrated Orthopaedics, Inc.:
The Annual Meeting of Stockholders of Integrated Orthopaedics, Inc. (the
"Company") will be held at the Doubletree Hotel, 2001 Post Oak Boulevard,
Houston, Texas 77056, at 9:00 a.m., local time, May 6, 1998 for the following
purposes:
1. To elect four Directors by vote of the Common Shareholders and Series A
Preferred Shareholders to serve until the 1999 Annual Meeting of Stockholders
or until their successors shall have been duly elected and qualified;
2. To elect three Directors by vote of the Series B Preferred Shareholders to
serve until the 1999 Annual Meeting of Stockholders or until their successors
shall have been duly elected and qualified; and
3. To transact such other business as may properly come before the meeting.
Common stockholders, Series A Preferred stockholders, and Series B Preferred
stockholders of record at the close of business on March 13, 1998 will be
entitled to notice of and to vote at the meeting.
By order of the Board of Directors
JEFFERSON R. CASEY, Secretary
Houston, Texas
Dated: April 13, 1998
Please mark, date and sign the enclosed proxy card and return it in the enclosed
addressed envelope at your earliest convenience, thereby saving the Company the
expense of further solicitation of proxies. Stockholders planning to attend the
Annual Meeting in person are requested to mark the appropriate box on the
enclosed Proxy.
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
5858 Westheimer, Suite 500
Houston, TX 77057
PROXY STATEMENT
1998 Annual Meeting of Stockholders
This proxy statement is furnished in connection with the solicitation by the
Board of Directors (the "Board") of Integrated Orthopaedics, Inc. (the
"Company") of the enclosed proxy (the "Proxy") to be used at the Company's 1998
Annual Meeting of Stockholders (the "Annual Meeting") and at any adjournments
thereof for the purposes of considering and voting upon the matters set forth in
the accompanying Notice of Annual Meeting of Stockholders. The Annual Meeting
is to be held at the Doubletree Hotel, 2001 Post Oak Boulevard, Houston, Texas
77056, at 9:00 a.m., local time, May 6, 1998. This Proxy Statement and the Proxy
were first sent or given to the Company's stockholders on or about April 13,
1998.
Only stockholders of record on March 13, 1998 (the "record date") are entitled
to notice of and to vote at the Annual Meeting and any adjournment thereof.
The Proxy, if properly executed and returned, will be voted (or withheld or
abstained from voting) according to the choices specified therein. The Proxy
will be voted in favor of (i) the election of each nominee for director named
thereon, unless a choice is indicated to withhold authority to vote for such
nominee, and (ii) each proposal described therein unless a choice is indicated
to vote against or to abstain from voting on any specific proposal.
The Proxy may be revoked (i) by providing written notice of such revocation to
Continental Stock Transfer & Trust Company, 2 Broadway, 19th Floor, New York, NY
10004, if such notice is received prior to 5:00 P.M., New York City time on
Monday, May 4, 1998, or (ii) by attendance at the meeting and voting in person.
Stockholders planning to attend the Annual Meeting in person are requested to
mark the appropriate box on the enclosed Proxy.
VOTE REQUIRED
The Common Stock, par value $.001 (the "Common Stock"), the Series A Cumulative
Convertible Preferred Stock ("Series A Preferred Stock") and the Series B
Convertible Non-Redeemable Preferred Stock ("Series B Preferred Stock") are the
only voting securities of the Company. As of the record date, there were (i)
6,310,293 shares of Common Stock issued and 6,296,460 shares outstanding and
13,833 shares held in the treasury, (ii) 25,226 shares of Series A Preferred
Stock issued and outstanding, and (iii) 251,170 shares of Series B Preferred
Stock issued and outstanding.
VOTE BY COMMON SHAREHOLDERS AND SERIES A PREFERRED SHAREHOLDERS
The presence, in person or by proxy, of a majority of the votes represented by
the aggregate of the outstanding shares of Common Stock and Series A Preferred
Stock on the record date is necessary to constitute a quorum at the meeting for
the purpose of electing four of the seven nominees for director, Messrs.
Kauachi, Pierce, and Hinkle and Dr. McGinty (collectively, the "Common
Nominees"). For the election of the Common Nominees and any matter that may
properly come before the meeting on which the Common shareholders and Series A
Preferred Stock shareholders are entitled to vote, each holder of Common Stock
is entitled to one vote
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for each share of Common Stock owned on the record date. Each holder of Series A
Preferred Stock is entitled to approximately 32.6 votes for each share of Series
A Preferred Stock owned on the record date (in aggregate, 823,464 votes).
Assuming the presence of a quorum for purposes of voting on the Common Nominees,
the affirmative vote of the holders of at least a majority of the votes
represented at the Annual Meeting and eligible to vote thereon is required for
the approval of Item 1 set forth in the accompanying Notice.
VOTE BY SERIES B PREFERRED SHAREHOLDERS
The presence, in person or by proxy, of a majority of the votes represented by
the aggregate of the outstanding shares of Series B Preferred Stock on the
record date is necessary to constitute a quorum at the meeting for the purpose
of electing three of the seven nominees for director, Messrs. Crandall, Hancock
and Wolfson (collectively, the "Series B Nominees"). For the election of the
Series B Nominees and any matter that may properly come before the meeting on
which the Series B Preferred Stock shareholders are entitled to vote, each
holder of Series B Preferred Stock is entitled to approximately 16.7 votes for
each share of Series B Preferred Stock owned on the record date (in aggregate,
4,186,167 votes). Assuming the presence of a quorum, the affirmative vote of the
holders of at least a majority of the votes represented at the Annual Meeting
and eligible to vote thereon is required for the approval of Item 2 set forth in
the accompanying Notice.
OTHER MATTERS AND VOTING REQUIREMENTS
Holders of the Common Stock, Series A Preferred Stock (on an "as converted"
basis) and the Series B Preferred Stock (on an "as converted" basis) are
eligible to vote on any matters other than Items 1 and 2 set forth in the
accompanying Notice that may properly come before the meeting. Proxies
representing Common Stock are being tallied by Continental Stock Transfer &
Trust Company for stockholders who are not present at the Annual Meeting.
Proxies representing Series A Preferred Stock and Series B Preferred Stock are
being tallied by the Company for stockholders who are not present at the Annual
Meeting. A panel of three judges appointed by the Company will tabulate the
shares which are voted by Proxy and in person at the Annual Meeting. Abstentions
and broker non-votes are counted for the purposes of determining the presence or
absence of a quorum for the transaction of business. Abstentions are counted in
tabulations of the votes cast or proposals presented to stockholders, whereas
broker non-votes are not counted for the purposes of determining whether a
proposal has been approved.
ITEMS 1 and 2
NOMINEES, DIRECTORS AND COMMITTEES
The seven persons named below, all of whom are presently directors of the
Company, have been nominated for election as directors of the Company. Four
directors, the Common Nominees, are to be elected by the holders of Common Stock
and the holders of Series A Preferred Stock (on an as converted basis). Three
directors, the Series B Nominees, are to be elected by the holders of Series B
Preferred Stock voting separately as a class. The number of directors elected to
the Board can range from two to a maximum number to be determined by a majority
vote of the board of directors as provided in the Company's Bylaws. At the
meeting, seven directors are to be elected to hold office until the next annual
meeting of shareholders or until the successors of each shall be qualified. The
four Common Nominees are Jose E. Kauachi, Ronald E. Pierce, Clifford R. Hinkle
and John B. McGinty, M.D. The three Series B Nominees are J. Taylor Crandall,
Mark A. Wolfson and Scott J. Hancock. All nominees are currently directors of
the Company. Unless a choice is specifically indicated on the enclosed Proxy to
withhold authority to vote for a nominee, all shares represented by proxies
which are executed and received prior to the meeting will be voted for the
election of said nominees.
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Messrs. Kauachi, Pierce, Hinkle, Crandall, Wolfson, and Hancock and Dr. McGinty
have each consented to being named in this proxy statement and have agreed to
serve if elected. Although it is not contemplated that any of these nominees
will be unable to serve, if such a situation arises before or during the
meeting, the proxies will be voted for any nominee who shall be designated by
the present Board of Directors to fill such vacancy.
Appearing below is certain biographical and other information with respect to
each nominee.
Name Age Position
COMMON NOMINEES
Jose E. Kauachi 59 Non-executive Chairman of the Board
Ronald E. Pierce 43 President, Chief Executive
Officer and Director
Clifford R. Hinkle 49 Director
John B. McGinty, M.D. 67 Director
SERIES B NOMINEES
J. Taylor Crandall 44 Director
Mark A. Wolfson 45 Director
Scott J. Hancock 39 Director
COMMON NOMINEES
Jose E. Kauachi (age 59) Mr. Kauachi currently serves as Non-executive Chairman
of the Board and has been a director of the Company since October 1986. Until
December 12, 1997, he had served variously as President, Chairman of the Board,
Chief Executive Officer and Treasurer of the Company since October 1986. Mr.
Kauachi received his degree in Mechanical Engineering Route to Business
Administration in 1965 from the University of Texas. Mr. Kauachi was an
independent top management consultant specializing in projects in the medical
field from 1984 through 1987. During this period he assisted start-up
businesses and in the development of existing businesses, including the founding
of the Company in 1986. As a top management consultant, Mr. Kauachi performed
management consulting work for the government of Mexico in connection with
overall organization, strategic planning and finance. He also provided
consulting services for Mexican and Spanish companies interested in establishing
and developing business operations in the Southwestern United States. Mr.
Kauachi was Director of the Mexico Division of Financiera de Nuevo Leon, SA de
CV a Mexican investment bank from 1976 through 1976; a top management consultant
for McKinsey & Company, Inc., a New York based international top management
consulting firm, from 1972 through 1974; Project Manager for Banamex, a Mexican
banking and industrial group from 1971 through 1972; international Credit
Manager with the International Bank of America in San Francisco, California from
1969 to 1971; and Vice President and General Manager of Carte Blanche
Corporation's credit card operations in Mexico from 1967 to 1969.
Ronald E. Pierce (age 43) Mr. Pierce has served as President and Chief Executive
Officer of the Company since December 15, 1997 and as a director of the Company
since his election to the Board of Directors on May 8, 1997. He served as
President and Chief Operating Officer of the Company from October 1996 until
December 1997. Mr. Pierce received his Bachelor of Arts and Masters of Science
degrees from the State University of New York in 1976 and 1978, respectively.
With over 18 years of healthcare management experience, Mr. Pierce was recruited
to transition the Company to a specialty focused physician practice management
strategy. From 1995 to 1996, Mr. Pierce was Vice President of Operations at
American Oncology Resources, a leading single specialty physician practice
management company focused on oncology, where he successfully redefined
corporate infrastructure, decentralized operations, created new operating
processes, and
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implemented same store growth strategies. From 1989 to 1995, Mr. Pierce served
as Vice President at Caremark International, a physician practice management
company now part of MedPartners. From 1980 to 1989, he served in various
management positions at Baxter International and American Hospital Supply
Corporation.
Clifford R. Hinkle (age 49) Mr. Hinkle has served as a director of the Company
since November 1996. Since 1991, Mr. Hinkle has been a director and executive
officer of the Flagler Company, including Flagler Capital Corporation
(President, 1991 present), which provides financial advisory and investment
consulting services; and Flagler Holdings, Inc. (Chairman and CEO, 1996
present), a merchant banking company, which owns a majority interest in
Augustine Asset Management, a federally regulated Registered Investment Advisor,
among other interests. He was a director (1993-95) and CEO (1995) of MHI Group,
Inc., a New York Stock Exchange company, which owned and operated funeral homes
and cemeteries from 1993 until November 1995 when the company was acquired by a
subsidiary of The Loewen Group. Since 1993, he has been a director of Commercial
Net Lease Realty, Inc., a NYSE listed real estate investment trust. Mr. Hinkle
is a director of Price Succession, Inc. (1996 - present). From 1987 to 1991,
Mr. Hinkle was the Executive Director and Chief Investment Officer of the State
Board of Administration of Florida and managed over $40 billion in various trust
funds.
John B. McGinty, M.D. (age 67) Dr. McGinty has served as a director since his
election to the Board of Directors on October 6, 1997. He is an orthopaedic
surgeon who has experience both in academic institutions and private practice.
He graduated from Harvard college in 1952 with an AB in chemistry and Tufts
University School of Medicine in 1956. After five years of postgraduate training
at Yale New Haven Hospital in New Haven, Connecticut and the Harvard hospitals
in Boston, Massachusetts, he spent 4 years in the U.S. Army practicing
orthopaedics in Frankfurt, Germany and Valley Forge Army Hospital in
Pennsylvania. He then spent 18 years in private practice in the Boston area
with academic appointments at Harvard and Tufts. In 1984 he accepted the
position of professor and chairman of the Department of Orthopaedic Surgery at
the Medical University of South Carolina in Charleston, where he remained until
moving to Mobile, Alabama in 1994. Dr. McGinty is now the Executive Vice
President of the Arthroscopy Association of North America, Medical Editor of
Orthopedics Today and does other consulting work. He has been active in
education in orthopaedics nationally and internationally, serving on many
programs, writing articles, monographs and books and serving many visiting
professorships. He is a member of numerous national and international
associations, having served as president of the American Academy of Orthopaedic
Surgeons, the Arthroscopy Association of North America and the International
Arthroscopy Association.
SERIES B NOMINEES
J. Taylor Crandall (age 44) Mr. Crandall has served as a director of the
Company since his election to the Board of Directors on December 15, 1997. He
has served as Chief Financial Officer and Vice President of Keystone, Inc. since
1986. He also has served as President and a director of Acadia MGP, Inc. since
1992. He serves on the Board of Directors of Bell & Howell Company, Quaker
State Corporation, Signature Resorts, Inc., Specialty Foods, Inc. and Washington
Mutual, Inc. Prior to his affiliation with Keystone, Mr. Crandall served as a
Vice President with the First National Bank of Boston from 1976 to 1986 where he
managed the bank's Dallas energy office. Mr. Crandall holds a BA degree from
Bowdoin College, where he serves on the Board of Overseers.
Mark A. Wolfson (age 45) Mr. Wolfson has served as a Director since his election
to the Board of Directors on December 15, 1997. He has served as a Vice
President of Keystone, Inc. since 1995. Mr. Wolfson is also a principal of
Arbor Investors, L.L.C. He serves on the Board of Directors of Investment
Technology Group and the Jefferies Group. Mr. Wolfson holds the title of
Professor at the Stanford Graduate School of Business, where he has been a
faculty member since 1977, including a three-year term as Associate Dean. He
has also taught at the Harvard Business School and the University of Chicago and
has been a Visiting Scholar at the Sloan School of Management at Massachusetts
Institute of Technology and the Hoover Institution at Stanford University. Mr.
Wolfson has been a Research Associate at The National Bureau of Economic
Research since
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1988 and serves on the Steering Committee of the Center for Economic Policy
Research at Stanford University. He is currently serving as a member of the
Acquisition Committee.
Scott J. Hancock (age 39) Mr. Hancock has served as a Director since his
election to the Board of Directors on December 15, 1997. He has served as and a
principal of Arbor Investors, L.L.C. since 1996 where he invests equity capital
primarily in the healthcare industry. From 1993 until joining Arbor, Mr.
Hancock worked at Bain Capital, Inc. where he made private equity investments in
the healthcare, information technology and software industries. Prior to
Joining Bain Capital, Mr. Hancock was Vice President, Business Development for
Vivra, Inc. (1993), a specialty healthcare services company, and a manager for
Bain & Company (1989 to 1993). He holds a B.S. degree from the University of
California, Berkeley and an MBA from Stanford Graduate School of Business. He
has also served as a member of the Acquisition, Compensation and Audit
Committees since his election as a director.
COMMITTEES AND MEETINGS
The Board of Directors held three formal meetings during 1997. The Board also
took action by unanimous written consent on 24 occasions.
The Board of Directors has standing Audit, Compensation, and Acquisition
Committees. The 1998 Audit Committee will be composed of Clifford R. Hinkle,
Mark A. Wolfson and Scott J. Hancock. The Compensation Committee will be
comprised of Clifford R. Hinkle, Mark A. Wolfson and Scott J. Hancock. The
Acquisition Committee will be comprised of Mark A. Wolfson, Scott J. Hancock and
Dr. John B. McGinty.
Audit Committee. The Audit Committee's functions are to monitor and review the
performance of the Company's independent accountants and recommend to the Board
from year to year a firm to be selected as the Company's independent
accountants. The Audit Committee's role also includes reviews of the Company's
policies and procedures with respect to auditing, accounting, and financial
controls, periodic informal meetings with the Company's staff regarding
accounting and financial procedures and recommendations to the Board regarding
methods of control over the audit and accounting functions.
Compensation Committee. The Compensation Committee's functions are to
establish and to administer the Company's compensation plans, to recommend the
adoption of new plans or amendments to existing plans, and to recommend to the
Board the salary ranges and other remuneration payable to the officers,
managerial, and technical personnel of the Company. The Committee made
recommendations regarding compensation matters as necessary to the Board of
Directors and all matters were approved by unanimous consent of all other
Directors of the Company.
Acquisition Committee. The Acquisition Committee's functions are to establish
financial and operational guidelines for the Company's affiliation transactions
with medical practices, to monitor the Company's compliance with such
guidelines, and to approve exceptions to such guidelines when appropriate. The
Acquisition Committee also monitors the financial and operational performance of
affiliated practices.
The Company has no nominating committee or any committee serving a similar
function.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE ELECTION OF EACH
OF THE INDIVIDUALS NOMINATED FOR ELECTION AS DIRECTOR.
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EXECUTIVE OFFICERS
The following table lists the present executive officers of the Company as of
the date hereof and the capacities in which they serve.
Name of Individual Age Capacity
Ronald E. Pierce 43 President and Chief Executive Officer
Mark Kingston 36 Executive Vice President and
Chief Operating Officer
Jefferson R. Casey 46 Senior Vice President and Chief
Financial Officer, Secretary and
Treasurer
Kerry N. Lowery 39 Senior Vice President, Development
D. Shane Hunt 36 Vice President, Development
Biographical information with respect to Mr. Pierce was previously described
under Item 1. Biographical information with respect to the other executive
officers is as follows:
Mark P. Kingston (age 36) serves as Executive Vice President and Chief Operating
Officer. He joined the Company in March 1998, and is responsible for Company
development and operating functions. Prior to IOI, Mr. Kingston was Executive
Vice President - Planning for Physicians Resource Group (PRG) since June 1997.
He also served PRG as Chief Development Officer since April 1995, and served as
a founder and consultant on practice asset acquisitions and operations from
September 1994 to April 1995. Mr. Kingston served as a Manager for Iolab -
Johnson & Johnson, Inc. from June 1990 through August 1994. Mr. Kingston's
responsibilities included the development of physician consulting services,
national contracting with purchasing entities, and division sales management.
From 1988 to 1990, he served as President of Masters Medical Practice Planning.
Mr. Kingston received his MBA from the University of Indianapolis in 1988 and a
BS degree from Mt. Union College in 1983.
Jefferson R. Casey (age 46) is presently serving as Senior Vice President and
Chief Financial Officer, Secretary, and Treasurer, and has served variously as
Executive Vice President and President since December 3, 1991. Mr. Casey was
Vice President, Chief Financial Officer and on the Board of Directors of Avanti
Health Systems, Inc. from December 19, 1988 until March 15, 1991. Mr. Casey was
self-employed as a management and financial consultant from March 15, 1991 until
joining the Company in December 1991. From November 7, 1979 until December 18,
1988 he served as Vice President of Finance, Chief Financial Officer with
Community Health Computing, Inc. Mr. Casey was Controller of Arbuckle
Electrical Machinery, Co., Inc. from April 6, 1978 to December 17, 1979, and
served as a Commercial Banking Officer with Houston Citizens Bank & Trust from
January 1, 1976 through April 5, 1978. Mr. Casey received a Master of Business
Administration in Finance (1975) and a Bachelor of Business Administration in
Marketing (1973) from the University of Texas.
Kerry N. Lowery (age 39) serves as Senior Vice President of Business
Development. He joined the Company in December 1996, and is responsible for the
business development function of the company. Mr. Lowery has spent the past 14
years facilitating the integration of physician practices into single-specialty
and multi-specialty networks within various markets nationwide. Prior to joining
IOI, Mr. Lowery served as Director of Corporate Development for American
Oncology Resources (AOR), an oncology, single-specialty physician practice
management company, from December 1994 through November 1996. From March 1992
until joining AOR, Mr. Lowery served as President of Primedical Physician
Services. The business provided medical staff development and physician staffing
services for hospitals and medical groups. Prior to forming Primedical, Mr.
Lowery served as Chief Marketing Officer of a hospital in South Texas for Epic
Healthcare, a proprietary hospital management company from June 1991 until March
1992. From 1984 until 1991, Mr. Lowery served as an officer in various
capacities with Jackson and Coker, a national physician staffing and management
company. Mr. Lowery received his Bachelor of Business administration in
Accounting from Harding University.
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D. Shane Hunt (age 36) serves as Vice President of Business Development. He
joined the Company in September 1997, and is responsible for managing the
development and acquisition of physician practices into the IOI network. Mr.
Hunt focuses primarily in the Western United States. Mr. Hunt has spent the
last 12 years in key executive positions within the healthcare sector. Prior to
IOI, Mr. Hunt was the President and CEO of Hunt Company International from
November 1991 until August 1997. From February 1988 until October 1991 Mr. Hunt
developed and led an international team of consultants and successfully grew the
company to four regional offices before selling the company in the summer of
1997. Prior to that, Mr. Hunt was the Vice President of the Eastern United
States, representing Jackson & Coker, a national physician search and consulting
firm based in Atlanta, Georgia. Mr. Hunt has additional experience and
achievements with Johnson & Johnson and Boehringer Mannhiem where he served in
the areas of marketing and product management. Mr. Hunt has a BBA from Texas
A&M and an MBA from Harvard University.
Each officer has been elected to serve until the 1998 Annual Meeting of the
Board of Directors, which will be held May 7, 1998. The Company anticipates
that all of the officers will be re-elected to their positions at that time.
SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
On March 13, 1998, there was no person who owned of record, and none were known
to the Company to own beneficially, more than 5% of the Common Stock and Series
B Preferred Stock, except as set forth below.
<TABLE>
<CAPTION>
Common Stock Series B Preferred Stock
---------------------------- ----------------------------------
Amount and Amount and
Name and Address of Nature of Percent Nature of Percent
Beneficial Owners Beneficial Owner of Class Beneficial Owner of Class
- ------------------- ---------------- -------- ---------------- --------
<S> <C> <C> <C> <C>
Sharon Ann Donovan 1,294,850 shares (a) 20.1% - -
11430 I-10 East Freeway
Suite 360
Houston, Texas 77029
Jose E. Kauachi 1,380,037 shares (b) 21.2% - -
P.O. Box 1846/1847
Edwards, Colorado 81632
Chartwell Capital Investors, L.P. 823,424 shares (c) 11.6% - -
1610 Independent Square
Jacksonville, Florida 32202
J. Taylor Crandall 2,118,083 shares (d) 25.3% 125,585 50%
201 Main Street, Suite 3100
Ft. Worth, Texas 76102
FW Integrated Orthopaedics 2,093,083 shares (e) 25.0% 125,585 50%
Investors II, LP
201 Main Street, Suite 3100
Ft. Worth, Texas 76102
</TABLE>
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<PAGE>
(a) Includes 1,045,500 shares owned directly and 99,350 shares, options to
purchase 50,000 shares, and warrants to purchase 100,000 shares of Common
Stock owned by William F. Donovan, M.D., the spouse of Sharon Ann Donovan.
Sharon Ann Donovan disclaims any beneficial ownership with respect to
securities owned by Dr. Donovan.
(b) Represents 1,179,287 shares of Common Stock presently owned, 750 shares of
common stock owned by Mr. Kauachi's wife, 100,000 shares of Common Stock
which could be acquired upon exercise of Warrants by Mr. Kauachi (which
warrants are currently exercisable) and options to purchase 100,000 shares
(which options are currently exercisable). Mr. Kauachi disclaims any
beneficial ownership with respect to securities owned by his wife.
(c) Represents the shares obtainable upon conversion of 25,226 shares of the
Series A Preferred Stock owned by Chartwell Capital Investors, L.P.
(d) Represents 2,093,083 shares obtainable upon conversion of 125,585 shares of
the Series B Preferred Stock owned by FW Integrated Orthopaedics Investors,
LP, the general partner of which is Group 31, Inc., whose sole owner and
director is J. Taylor Crandall, a Company director, and 25,000 shares of
Common Stock owned by Group Special Investments, Inc., of which J. Taylor
Crandall is the sole shareholder and director.
(e) Represents 2,093,083 shares obtainable upon conversion of 125,585 shares of
the Series B Preferred Stock owned by FW Integrated Orthopaedics Investors
II, LP.
MANAGEMENT EQUITY OWNERSHIP
Listed in the table below are the equity securities beneficially owned as of
March 13, 1998, by directors, certain executive officers and directors and
executive officers as a group and the percent of class represented by the equity
securities owned by each person or group.
<TABLE>
<CAPTION>
Common Stock Series B Preferred Stock
------------------------------- ----------------------------
Amount and Amount of
Name and Address of Nature of Percent Nature of Percent
Beneficial Owners Beneficial Owner (a) of Class Beneficial Owner of Class
- ------------------- ------------------- --------- ---------------- --------
<S> <C> <C> <C> <C>
J. Taylor Crandall 2,122,083 (b) 25.3% 125,585(b) 50%
201 Main Street, Suite 3100
Ft. Worth, Texas 76102
Jose E. Kauachi 1,380,037 (c) 21.2% - -
P.O. Box 1846/1847
Edwards, Colorado 81632
Ronald E. Pierce. 128,600 (d) 2.0% - -
5858 Westheimer, Suite 500
Houston, Texas 77057
Jefferson R. Casey 118,550 (e) 1.9% - -
5858 Westheimer, Suite 500
Houston, Texas 77057
Clifford R. Hinkle 27,833 (f) * - -
P.O. Box 351
Tallahassee, Florida 32302
</TABLE>
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<TABLE>
<CAPTION>
Common Stock Series B Preferred Stock
------------------------------- ----------------------------
Amount and Amount of
Name and Address of Nature of Percent Nature of Percent
Beneficial Owners Beneficial Owner (a) of Class Beneficial Owner of Class
- ------------------- ------------------- --------- ---------------- --------
<S> <C> <C> <C> <C>
John B. McGinty, M.D. 7,000 (g) * - -
28 Country Club Road
Mobile, Alabama 36608
Scott J. Hancock 4,000 (h) * - -
201 Main Street, Suite 3100
Ft. Worth, Texas 76102
Mark A. Wolfson 4,000 (i) * - -
201 Main Street, Suite 3100
Ft. Worth, Texas 76102
Kerry N. Lowery * - -
5858 Westheimer, Suite 500
Houston, Texas 77057
Directors and Executive Officers 3,792,103(j) 69.0% 125,585 50%
as a group (nine persons)
</TABLE>
________________________
* Less than one percent
(a) The information as to beneficial ownership has been furnished by the
respective directors and officers. Each person or group has sole voting
and investment power unless otherwise indicated.
(b) Represents direct ownership of options to purchase 4,000 shares of Common
Stock which are exercisable within 60 days after the record date,
beneficial ownership of 25,000 shares owned by Group Special Investments,
Inc. of which Mr. Crandall is the sole director and shareholder, and
beneficial ownership of 2,093,083 shares obtainable upon conversion of
125,585 shares of the Series B Preferred Stock owned by FW Integrated
Orthopaedics Investors, LP, the general partner of which is Group 31, Inc.,
of which Mr. Crandall is the sole director and shareholder.
(c) Represents 1,179,287 shares of Common Stock presently owned, 750 shares of
common stock owned by Mr. Kauachi's wife, 100,000 shares of Common Stock
which could be acquired upon exercise of Warrants by Mr. Kauachi (which
warrants are currently exercisable) and options to purchase 100,000 shares
(which options are currently exercisable). Mr. Kauachi disclaims any
beneficial ownership with respect to securities owned by his wife.
(d) Represents 98,600 shares of Common Stock owned and options to purchase
30,000 shares of Common Stock (which options are currently exercisable).
(e) Represents 32,300 shares of Common Stock presently owned, and options to
purchase 86,250 shares of Common Stock (which options are currently
exercisable).
(f) Includes (a) 5,000 shares of Common Stock presently owned, (b) 10,000
shares of Common Stock held by Flagler Holdings, Inc. of which Mr. Hinkle
exercises sole voting and dispositive powers and (c) 12,833 shares of
Common Stock obtainable upon the exercise of options which are exercisable
within 60 days after the record date.
(g) Includes options to purchase 7,000 shares of Common Stock which are
exercisable within 60 days after the record date.
10
<PAGE>
(h) Includes options to purchase 4,000 shares of Common Stock which are
exercisable within 60 days after the record date.
(i) Includes options to purchase 4,000 shares of Common Stock which are
exercisable within 60 days after the record date.
(j) Represents 1,350,937 shares of Common Stock, options to purchase 248,083
shares of Common Stock, warrants to purchase 100,000 shares of Common Stock
(which options and warrants are exercisable within 60 days), and 2,093,083
shares obtainable upon conversion of 125,585 shares of the Series B
Preferred Stock.
EXECUTIVE COMPENSATION
The following table sets forth all compensation paid, distributed or accrued for
services rendered in all capacities to the Company during the fiscal years ended
December 31, 1997, 1996 and 1995 to the Company's Chief Executive Officer, and
the four most highly compensated executive officers other than the CEO whose
total compensation exceeds $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
(a) (b) (c) (g) (i)
Securities
Underlying
Options/SARs Other
Name and Principle Position Year Salary (#) Compensation
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jose E. Kauachi, CEO 1997 $293,004 200,000 $988,617/1/
(CEO through 1996 $289,688 150,000 $ 3,230/2/
December 12, 1997) 1995 $267,885 150,000 $ 4,414/3/
Ronald E. Pierce, 1997 $188,462 500,000 $ 288/4/
President and CEO 1996 $ 31,731 150,000 $ 288/5/
(CEO beginning
December 12, 1997)
Jefferson R. Casey 1997 $122,854 100,000 $ 600/6/
Sr. Vice President 1996 $102,524 86,250 $ 1,068/7/
1995 $ 81,296 86,250 $ 812/8/
Kerry N. Lowery 1997 $135,000 135,000 $ 600/9/
Sr. Vice President 1996 $ 14,423 75,000 $ 0
</TABLE>
1) Includes $966,000 paid in conjunction with the early termination of a
three-year consulting agreement, $11,750 in moving expenses, $6,617 in family
medical coverage costs paid by the Company, and $4,250 of term life insurance
premium paid by the Company for the benefit of Mr. Kauachi.
2) Amount of term life insurance premium paid by the Company for the benefit of
Mr. Kauachi.
3) Comprised of $4,196 in term life insurance premium paid for the benefit of
Mr. Kauachi and $218 paid by the Company into Mr. Kauachi's 401(k) account as an
employer matching contribution.
4) Amount paid by the Company into Mr. Pierce's 401(k) account as an employer
matching contribution.
5) Amount paid by the Company into Mr. Pierce's 401(k) account as an employer
matching contribution.
11
<PAGE>
6) Amount paid by the Company into Mr. Casey's 401(k) account as an employer
matching contribution.
7) Amount paid by the Company into Mr. Casey's 401(k) account as an employer
matching contribution.
8) Amount paid by the Company into Mr. Casey's 401(k) account as an employer
matching contribution.
9) Amount paid by the Company into Mr. Lowery's 401(k) account as an employer
matching contribution.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs In-the-Money
Held at FY-End(#) Options/SARs at FY-End($)
Shares
Acquired
On Value
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Jose E. Kauachi 0 $0 200,000 0 $1,031,250 $0
Ronald E. Pierce 0 $0 30,000 470,000 $146,250 $1,635,000
Jefferson R. Casey 0 $0 86,250 13,750 $415,156 $41,250
Kerry N. Lowery 15,000 $72,000 0 135,000 $0 $517,500
</TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(Individual Grants)
<TABLE>
<CAPTION>
Number of Percent of Total
Securities Options/SARs
Underlying Granted to Exercise or Market Price
Options/SARs Employees In Base Price Date of Grant Expiration
Name Granted # Fiscal Year ($/Sh) ($/Sh) Date
(a) (b) (c) (d)(1) (d)(2) (e)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ronald E. Pierce 350,000 31% $5.125 $5.250 6/29/2007
Jose E. Kauachi 50,000 4% $5.125 $5.250 6/29/2007
Jefferson R. Casey 13,750 1% $5.125 $5.250 6/29/2007
Kerry N. Lowery 75,000 7% $5.125 $5.250 6/29/2007
</TABLE>
Executive Employment Contracts
Jose E. Kauachi worked from the founding of the Company until November 15, 1994
without an employment agreement. On November 15, 1994, the Company entered into
an employment agreement with Jose E. Kauachi, to serve as the Company's
President and CEO for a period of three years (plus optional one-year renewals).
Mr. Kauachi resigned the President's title effective October 6, 1996, when
Ronald E. Pierce joined the Company as President and Chief Operating Officer.
Upon expiration of Mr. Kauachi's employment agreement on November
12
<PAGE>
15, 1997, the Company and Mr. Kauachi entered into a new employment agreement in
which Mr. Kauachi agreed to serve as the Company's CEO for a period of three
years (plus optional one-year renewals). Concurrently with the Company's
issuance of 250,000 shares of its Series B Preferred Stock and contingent
warrants, Mr. Kauachi resigned as Chief Executive Officer, resigned as Chairman
of the Board of Directors and was elected Non-executive Chairman of the Board of
Directors, agreed to the termination of his employment agreement, and accepted a
three-year consulting contract with the Company. In conjunction with these
agreements, the Company also agreed to modify the terms of options to purchase
50,000 shares of the Company's Common Stock such that Mr. Kauachi can exercise
those options until December 31, 1999. Until his resignation from employment,
the right to exercise these options was available to him until February 1, 2005.
Effective December 31, 1997, Mr. Kauachi and the Company agreed to an early
termination of the consulting agreement in exchange for a discounted, lump sum
payment of amounts due to Mr. Kauachi under the consulting agreement.
On November 15, 1997, the Company entered into an employment agreement with Jose
E. Kauachi, to serve as the Company's CEO for a period of three years (plus
optional one-year renewals). Compensation during the term of the agreement
included the Company's standard employee benefits, dependent healthcare
benefits, the use of an automobile and cellular telephone, long-term disability
insurance equal to 50% of his base salary, the cost of a $1,000,000 term life
insurance policy, and a base salary of $300,000 per year. If Mr. Kauachi's
employment had been terminated without cause, he would have received
compensation at the rate of $300,000 annually until the later of November 15,
2001 or one year following the date of his termination without cause. Mr.
Kauachi had agreed during the term of his employment and for a period of one
year thereafter not to compete with the Company. The Company could have
assigned this agreement to any successors or assigns, the definition of which
includes but may not be limited to any person that buys all or substantially all
of the Company's assets or at least 35% of the Company's voting equity, or with
which the Company merges or consolidates. Mr. Kauachi could have resigned at
any time after giving thirty days written notice to the Company, at the
expiration of which all compensation and benefits payable to him terminate.
On December 12, 1997, Mr. Kauachi resigned as CEO, agreed to the termination of
the November 15, 1997 employment agreement, and accepted a three-year consulting
agreement with the Company. In conjunction with this termination agreement, the
Company agreed to extend certain of Mr. Kauachi's rights with respect to options
and warrants to purchase Common Stock owned by Mr. Kauachi at the date of
termination. The consulting agreement provided for Mr. Kauachi to devote not
more than 140 hours per month to the provision of consulting services to the
Company. Mr. Kauachi was to receive cash compensation of $300,000 per year plus
the value of all benefits that were available to him under the terms of the
employment agreement terminated on December 12, 1997, all of which was to be
grossed up to account for the additional cost of self employment. Compensation
at this rate was guaranteed through December 31, 2000 unless the consulting
agreement was terminated by Mr. Kauachi without cause. In the event of Mr.
Kauachi's death or permanent disability, payments extended to the later of
December 31, 2000 or the one year anniversary of death or disability. If Mr.
Kauachi was removed as the Non-executive Chairman of the Board without cause
prior to December 31, 2000, all payments due to him were to be extended until
December 31, 2001. Mr. Kauachi agreed not to compete with the Company during
the term of this agreement and for a period of one year thereafter.
Effective December 31, 1997, Mr. Kauachi and the Company reached a negotiated
agreement to terminate the consulting agreement entered into on December 12,
1997. Mr. Kauachi agreed to a four-year non-competition clause with the Company
that ends on December 31, 2001 and to reduce the exercise period of options to
purchase 50,000 shares of the Company's Common Stock from February 1, 2005 to
December 31, 1999. In the event Mr. Kauachi is voted out as Non-executive
Chairman of the Board of Directors prior to December 31, 2000, he will receive
twelve monthly payments of $28,098 commencing on January 1, 2001. Mr. Kauachi's
rights to exercise 100,000 warrants, 50,000 options granted under the Company's
1988 Stock Option Plan, and 50,000 options granted under the Company's 1997 Long
Term Incentive Plan are exercisable until December 31, 1999, notwithstanding any
termination of his status as Non-executive Chairman of the Board of Directors.
In exchange for the above, the Company paid Mr. Kauachi a total of $966,000 in
cash. The Company also recorded a one-time, non-cash charge to retained
earnings of $281,250 in conjunction with the modification to the exercise period
of the 50,000 options granted to Mr. Kauachi under the Company's 1988 Stock
Option Plan.
13
<PAGE>
On December 12, 1997, the Company entered into an employment agreement with
Ronald E. Pierce to serve as the Company's President and Chief Executive Officer
for a period of three years. Compensation during the term of the agreement
includes a base salary of $250,000 per year, all Company benefits, participation
in any Company bonus plan, eligibility for stock options under any Company plan,
paid medical insurance for immediate family members, long term disability
insurance coverage equal to one-half base salary, and a $1.0 million dollar term
life insurance policy. If the agreement is terminated by the Company without
cause, base salary and the value of benefits will be paid to Mr. Pierce through
the expiration date of the agreement; provided however, if such termination
without cause occurs after July 1. 1999, payment of the same shall be made in a
lump sum and shall include payments due through a point in time that is the
later of one year from the date of the termination without cause or the
expiration date of the agreement. If the agreement is terminated without cause,
all options then granted to Mr. Pierce will become immediately vested and Mr.
Pierce will have ninety days following the date of termination during which to
exercise all such options. Mr. Pierce may resign at any time upon giving thirty
days notice to the Company. Compensation to Mr. Pierce will cease as of his
last day of employment if he resigns from the Company. Mr. Pierce has agreed
not to compete with the Company during the term and for a period of one year
following the termination of this agreement. This agreement is not assignable
by Mr. Pierce.
On January 22, 1995, the Company entered into an employment agreement with
Jefferson R. Casey, to serve as the Company's Senior Vice President-Chief
Financial Officer, Secretary, Treasurer and Principal Accounting Officer for a
period of three years. Pursuant to the terms of this employment agreement, Mr.
Casey agreed to serve for a period of three years (plus optional one year
renewals). This agreement renewed for a one-year term on January 22, 1998.
Compensation during the term of this agreement includes the Company's standard
benefits, the use or value of the use of an automobile and cellular telephone,
and a base salary, currently of $128,744 per year (which amount may increase
annually on January 22 of each year based on the Consumer Price Index depending
upon the Company's performance and which may also be increased at the discretion
of the Board of Directors). Mr. Casey has agreed during the term of his
employment and for a period of one year thereafter not to compete with the
Company regarding certain services. The Company may assign this agreement to
any successor or assign, the definition of which includes but may not be limited
to any person that buys all or substantially all of the Company's assets or at
least 40% of the Company's voting equity, or with which the Company merges or
consolidates. Mr. Casey may resign at any time after giving thirty days written
notice to the Company, at the expiration of which all compensation and benefits
payable to him shall terminate.
On September 30, 1997, the Company entered into an employment agreement with
Kerry N. Lowery to serve as the Company's Senior Vice President of Development
for a period of one year. Compensation during the term of the agreement
includes a base salary of $150,000 per year, all Company benefits, participation
in any Company bonus plan up to a level of 50% of base salary at the discretion
of the Company, and eligibility for stock options under the Company's long term
incentive plan. If the agreement is terminated by the Company without cause,
base salary and the value of benefits will be paid to Mr. Lowery for a period
not to exceed nine months from the date of his termination, but in no event
extending until after he accepts new employment. Mr. Lowery may resign at any
time upon giving thirty days notice to the Company. Compensation to Mr. Lowery
will cease as of his last day of employment if he resigns from the Company. Mr.
Lowery has agreed not to compete with the Company during the term and for a
period of one year following the termination of this agreement.
Directors' Compensation
All directors other than the Non-executive Chairman and the President, Chief
Executive Officer receive compensation for their services as Company directors.
Directors receive cash compensation of $5,000 annually plus $1,000 for each
meeting actually attended. When first elected to the Board of Directors, these
directors are granted options to purchase 12,000 shares of the Company's Common
Stock at an exercise price equal to the fair market value of the Company's
Common Stock as of the date of their election. These options vest 1,000 shares
per month over the first twelve months of service as a director and are
exercisable only during such time as the optionee is serving as a Company
director. In addition to the above, Mr. Hinkle received options to
14
<PAGE>
purchase 4,000 shares of Common Stock when first elected to the Board of
Directors on November 14, 1996. The right to exercise such options vests equally
over the two-year period following the grant of the option and vested options
are exercisable until November 13, 1999. All directors are entitled to
reimbursement for reasonable travel expenses incurred in attending meetings of
the Company's directors.
The Company entered into a one-year consulting agreement with John B. McGinty,
M.D. on October 6, 1997. Compensation payable to Dr. McGinty under this
agreement is set at $4,000 per month plus reasonable out of pocket expenses.
Under this agreement, Dr. McGinty is obligated to identify and evaluate practice
affiliation candidates, make appropriate introductions, identify meetings and
conferences appropriate for the Company to attend, and provide a physician's
perspective on various marketing approaches, operational issues and practice
acquisition related matters. Payments to Dr. McGinty during 1997 totaled
$12,000.
On December 12, 1997, the Company and Jose E. Kauachi entered into a three-year
consulting agreement, the early termination of which was negotiated between the
Company and Mr. Kauachi effective December 31, 1997. Refer to the sections
headed " Related Party Transactions" and "Executive Employment Contracts" for
additional details.
RELATED PARTY TRANSACTIONS
In December 1997, the Company expanded its board of directors to eight seats and
Jose E. Kauachi (Chairman of the Board of Directors and a greater than 10%
shareholder) resigned as Chief Executive Officer and was elected Non-executive
Chairman of the Board of Directors. Mr. Kauachi agreed to the termination of
his employment agreement with the Company and accepted a three-year consulting
contract with the Company. Subsequently, the Company and Mr. Kauachi agreed to
an early termination of the consulting contract and the Company paid Mr. Kauachi
a discounted amount of $966,000 in cash. Mr. Kauachi also agreed to reduce to
December 31, 1999 the time in which to exercise options to purchase 50,000
shares of the Company's common stock that were available to him until February
1, 2005 as an employee. The Company recorded a non-cash charge to consulting
expense and an offsetting increase in additional paid in capital of $281,250 in
conjunction with this modification.
In March 1995, the Company reorganized its Houston operations whereby
substantially all medical and ancillary services were structured to be provided
by a medical group affiliated with the Company. In this regard, the Company
assisted in the formation of a professional limited liability partnership named
PhysiCare, L.L.P. ("PhysiCare"). Two of the partners of PhysiCare, Northshore
Orthopedics Assoc. ("NSO") and Occupational Medicine Associates of Houston, P.A.
("OMA"), are controlled by Dr. William F. Donovan ("Donovan"), then a Company
director and, beneficially, a greater than 10% shareholder of the Company. In
connection with the organization of PhysiCare, the Company (i) agreed to advance
PhysiCare a loan secured by all of the assets of PhysiCare, and (ii) advanced to
Dr. Donovan and NSO collectively a loan of up to $500,000 which was
collateralized by approximately $1.3 million of the accounts receivable of NSO
and Donovan. The $500,000 note was re-paid in November 1996. The balance of
the loan to PhysiCare at November 30, 1997, when the Company's management
relationship with PhysiCare was terminated, was approximately $1,237,000. In
terminating this agreement, a subsidiary of the Company forgave approximately
$577,000 of this note in exchange for net assets of PhysiCare in a like amount.
NSO assumed the balance of approximately $660,000 on a non-recourse basis. In
December 1997,the Company took charges of $548,000 to reduce this note
receivable from NSO to its estimated realizable value based on the value of the
assets to which it had recourse.
The Company, either directly or through PhysiCare, paid Donovan and NSO,
$668,042 in 1997 and $728,731 in 1996 for Donovan's professional medical
services to patients of PhysiCare, medical director's fees, equipment and
leasehold rentals, and contracted services. PhysiCare incurred $4,443,002 and
$5,073,233 in cost reimbursement and management fee expenses to a subsidiary of
the Company in 1997 and 1996, respectively.
From September 1992 until October 1996, the Company leased several office suites
used for clinic and administrative functions at prevailing market rates from
Pacati, Inc., a company which is jointly owned by Mr.
15
<PAGE>
Kauachi and Dr. Donovan. The leases were canceled in October 1996 as a result of
Pacati, Inc.'s sale of the property to an unrelated party. The Company paid
Pacati, Inc. $160,623 in 1996 under the rental arrangements.
In June 1996, the Company converted a $2,522,603 loan with Chartwell Capital
Investors, LP (Chartwell) into 25,226 shares of cumulative, convertible
preferred stock.
In December 1997, the Company entered into a Securities Purchase Agreement with
FW Integrated Orthopaedics Investors, LP and FW Integrated Orthopaedics
Investors II, LP (collectively, the "Purchasers") pursuant to which, in exchange
for aggregate consideration of $25,000,000, the Company issued to each of such
entities (i) 125,000 shares of the Company's Series B Preferred Stock and (ii)
warrants initially convertible upon vesting into up to 2,083,333 shares of the
Company's Common Stock. Messrs. Crandall, Wolfson, and Hancock, directors of
the Company, were director designees of the Purchasers. Mr. Crandall is the
sole shareholder and director of Group 31, Inc., the general partner of FW
Integrated Orthopaedics Investors, LP. None of Messrs. Crandall, Wolfson and
Hancock were directors of the Company prior to the closing of this transaction.
Option Repricing
In conjunction with Jose E. Kauachi's termination of employment, acceptance of a
three-year consulting agreement with the Company, and subsequent early
termination of the consulting agreement, the Company and Mr. Kauachi agreed to
reduce to December 31, 1999 the time in which Mr. Kauachi can exercise options
to purchase 50,000 shares of the Company's common stock that were available to
him until February 1, 2005 as an employee. These options were originally issued
with an exercise price of $2.50 per share on February 2, 1995. As of December
31, 1997, the date of the modification to the terms of the option, the market
value of the Company's stock was $8.125 per share. The Company valued the
modification to the terms of the option using the Black-Scholes Fair Value
Pricing Model and recorded a non-cash charge to consulting expense and an
offsetting increase in additional paid in capital of $281,250 in conjunction
with this modification. Refer to the sections titled "Related Party
Transactions" and "Executive Employment Contracts" for additional information.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), requires the Company's directors and executive officers, and persons who
own more than 10% of a registered class of the Company's equity securities, to
file initial reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission (the "SEC"). Directors, executive officers
and greater than 10% beneficial owners are required by SEC regulation to furnish
the Company with copies of all Section 16(a) Forms 3, 4 and 5 they file. Based
solely upon a review of such Forms 3, 4 and 5 and any amendments thereto
furnished to the Company, and written representations from certain reporting
persons that no Forms 5 were required, the Company believes that all such
applicable filing requirements were complied with by each of the executive
officers, directors and greater than 10% shareholders, except for (i) one report
relating to three transactions for Dr. Donovan, a former director of the Company
in connection with gifts of stock this children; (ii) one report relation to
options granted to Dr. Rivera, a former director of the Company; (iii) one
report for Mr. Lowery regarding a revised schedule for certain stock options
previously granted to him and one additional report for Mr. Lowery regarding the
exercise of a stock option and sale of the shares of stock obtained thereby. In
addition, Dr. McGinty's initial report on Form 3 was filed late.
OTHER MATTERS
Management is not aware of any other matters to be presented for action at the
meeting. However, if any other matter is properly presented, it is the
intention of the persons named in the enclosed form of proxy to vote in
accordance with their best judgment on such matter.
16
<PAGE>
A copy of the Company's Annual Report for the year ended December 31, 1997,
including audited financial statements, as filed with the Securities and
Exchange Commission as its Annual Report on Form 10-KSB (except for exhibits
thereto), accompanies this proxy statement. The Annual Report does not form any
part of the material for solicitation of proxies, but contains important
information on the Company's business and financial condition. The Annual
Report contains a list describing all the exhibits thereto and any exhibit is
available to a stockholder upon written request to the President of the Company
at the address of the Company set forth on the first page hereof accompanied by
payment to the Company of $35.00 plus $0.25 per page for each exhibit requested,
which amount represents reasonable expenses incurred by the Company in
furnishing a copy of an exhibit.
The Company will bear the costs of the solicitation of proxies from its
stockholders. In addition to the use of mail, proxies may be solicited by
directors, officers and regular employees of the Company in person or by
telephone or other means of communication. The directors, officers and
employees of the Company will not be compensated additionally for the
solicitation but may be reimbursed for out-of-pocket expenses in connection with
the solicitation. Arrangements are also being made with brokerage houses and
also any other nominees and fiduciaries for the forwarding of solicitation
material to the beneficial owners of the Company, and the Company will reimburse
the brokers, custodians, nominees and fiduciaries for their reasonable out-of-
pocket expenses.
STOCKHOLDER PROPOSALS
Proposals by stockholders intended to be presented at the 1999 Annual Meeting of
Stockholders must be received by the Company for inclusion in the Company's
Proxy Statement and form of proxy relating to that meeting not later than
December 13, 1998.
BY ORDER OF THE BOARD OF DIRECTORS
JEFFERSON R. CASEY, Secretary
Houston, Texas
April 13, 1997
17
<PAGE>
INTEGRATED ORTHOPAEDICS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Ronald E. Pierce and Jefferson R. Casey, each
with full power of substitution, as proxies and authorizes each of them, acting
individually, to vote as designated below, all shares of Common Stock and
Series A Cumulative Convertible Preferred Stock of Integrated Orthopaedics,
Inc. (the "Company") owned by the undersigned at the Annual Meeting of
Shareholders of the Company to be held at the Doubletree Hotel, 2001 Post Oak
Boulevard, Houston, Texas 77056 at 9:00 a.m. (local time) May 6, 1998, or any
adjournment thereof.
The undersigned hereby revokes any proxies heretofore given to vote upon or
act with respect to such shares, and hereby ratifies and confirms all that said
attorneys, agents, proxies, the substitutes or any of them may lawfully do by
virtue hereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 1.
1. ELECTION OF DIRECTORS OF THE COMPANY
[_]FOR all nominees listed below (except as marked to the contrary)
[_]WITHHOLD AUTHORITY to vote for all nominees listed below:
Jose E. Kauachi Ronald E. Pierce Clifford R. Hinkle John B.
McGinty, M.D.
INSTRUCTIONS: TO WITHHOLD AUTHORITY FOR ANY INDIVIDUAL NOMINEE, WRITE
NOMINEE'S NAME ON THE SPACE PROVIDED BELOW:
- --------------- --------------- --------------- ---------------
2. [Voting on Item 2 is reserved to the holders of the Company's Series B
Preferred Stock]
3. In their discretion, the proxies are authorized to vote as they deem
appropriate upon any other matter that properly may come before the meeting
or any adjustment thereof.
(Please sign on reverse side)
This proxy, when properly executed, will be voted in the manner directed
herein by the stockholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
"FOR" PROPOSAL 1. If more than one of the proxies designated hereby shall be
present in person or by substitution at the Annual Meeting, or at any
adjournment thereof, the majority of said proxies present and voting, either in
person or by substitution, shall exercise all the powers herein given.
--------------------------------------
--------------------------------------
DATED: , 1998
Please date, sign exactly as your
name appears hereon and mail this
proxy card in the enclosed envelope.
No postage is required. Where there
is more than one owner, each should
sign. Then signing as an attorney,
administrator, executor, guardian or
trustee, please add your title as
such. If executed by a partnership,
this proxy should be signed in the
partnership name by an authorized
person. If executed by a corporation,
this proxy should be signed by a duly
authorized officer.
[_]Please check this box if you plan
on attending the Annual Meeting.
IMPORTANT: COMPLETE APPROPRIATE FORM ON REVERSE
<PAGE>
<TABLE>
<CAPTION>
INTEGRATED ORTHOPAEDICS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Ronald E. Pierce and Jefferson R. Casey, each with full power of substitution, as proxies and
authorizes each of them, acting individually, to vote as designated below, all shares of Series B Convertible, Non-Redeemable
Preferred Stock of Integrated Orthopaedics, Inc. (the "Company") owned by the undersigned at the Annual Meeting of Shareholders of
the Company to be held at the Doubletree Hotel, 2001 Post Oak Boulevard, Houston, Texas 77056 at 9:00 a.m. (local time) May 6, 1998,
or any adjournment thereof.
The undersigned hereby revokes any proxies heretofore given to vote upon or act with respect to such shares, and hereby
ratifies and confirms all that said attorneys, agents proxies, the substitutes or any of them may lawfully do by virtue hereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 2.
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1. [Voting on Item 1 is reserved to the holders of the Company's Common Stock and Series A Preferred Stock]
2. ELECTION OF DIRECTORS OF THE COMPANY
[_] FOR all nominees listed below (except as marked to the contrary)
[_] WITHHOLD AUTHORITY to vote for all nominees listed below:
J. Taylor Crandall Mark A. Wolfson Scott J. Hancock
INSTRUCTIONS: To withhold authority for any individual nominee, write nominee's name on the space provided below:
_______________________________ _________________________________ ___________________________
3. In their discretion, the proxies are authorized to vote as they deem appropriate upon any other matter that properly may come
before the meeting or any adjournment thereof.
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This proxy, when properly executed, will be voted in the manner directed herein by the stockholder. IF NO DIRECTION IS MADE,
THIS PROXY WILL BE VOTED "FOR" PROPOSAL 2. If more than one of the proxies designated hereby shall be present in person or by
substitution at the Annual Meeting or at any adjournment thereof, the majority of said proxies present and voting, either in
person or by substitution, shall exercise all the powers herein given.
__________________________________________________
__________________________________________________
DATED: ________________________, 1998
Please date, sign exactly as your name appears hereon and
mail this proxy card in the enclosed envelope. No postage is
required. Where there is more than one owner, each should
sign. When signing as an attorney, administrator, executor,
guardian or trustee, please add your title as such. If
executed by a partnership, this proxy should be signed in the
partnership name by an authorized person. If executed by a
corporation, this proxy should be signed by a duly authorized
officer.
[_] Please check this box if you plan on attending the Annual
Meeting.
IMPORTANT: Complete appropriate FORM on reverse
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